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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

OR

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

Commission File Number: 001-36708

 

Uniti Group Inc.

(Exact name of registrant as specified in its charter)

 

Maryland

46-5230630

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

 

10802 Executive Center Drive

Benton Building Suite 300

Little Rock, Arkansas

72211

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (501) 850-0820

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

UNIT

The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No    

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes        No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No  

As of November 1, 2019, the registrant had 193,275,587 shares of common stock, $0.0001 par value per share, outstanding.

 

 


Table of Contents

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q includes forward-looking statements as defined under U.S. federal securities law. Forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, statements regarding: our expectations regarding the effect of Windstream Holdings, Inc.’s (“Windstream Holdings” and together with its subsidiaries, “Windstream”) bankruptcy and Windstream’s performance under its long-term exclusive triple-net lease with us (the “Master Lease”); our expectations with respect to the treatment of the Master Lease in Windstream’s petitions for relief under Chapter 11 of the Bankruptcy Code, including with respect to Windstream’s claims that the Master Lease should be recharacterized as a financing transaction, that the Master Lease is a lease of personal property and that rent payments and tenant capital improvements made by Windstream under the Master Lease constituted constructive fraudulent transfers; our expectations regarding the effect of substantial doubt about our ability to continue as a going concern; our expectations regarding the future growth and demand of the telecommunications industry, future financing plans, business strategies, growth prospects, operating and financial performance, and our future liquidity needs and access to capital; expectations regarding the impact and integration of Information Transport Solutions, Inc. (“ITS”) and M2 Connections, including expectations regarding operational synergies with Uniti Towers and Uniti Fiber; expectations regarding the probability of our obligation to pay contingent consideration upon Tower Cloud, Inc.'s (“Tower Cloud”) achievement of certain defined operational and financial milestones; expectations regarding future deployment of fiber strand miles and small cell networks and recognition of revenue related thereto; expectations regarding levels of capital expenditures; expectations regarding the deductibility of goodwill for tax purposes; expectations regarding reclassification of accumulated other comprehensive income (loss) related to derivatives to interest expense; expectations regarding the amortization of intangible assets; expectations regarding the impact of the operating company-property company partnership with Macquarie Infrastructure Partners and related acquisition of Bluebird Network, LLC (“Bluebird”); our expectations regarding the wind down of the Consumer CLEC business; and expectations regarding the payment of dividends.

 

Words such as “anticipate(s),” “expect(s),” “intend(s),” “plan(s),” “believe(s),” “may,” “will,” “would,” “could,” “should,” “seek(s)” and similar expressions, or the negative of these terms, are intended to identify such forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could lead to actual results differing materially from those projected, forecasted or expected. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to:

 

 

the future prospects of our largest customer, Windstream Holdings, which, following a finding that it is in default of certain of its debt, on February 25, 2019, and along with all of its subsidiaries, filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code;

 

our ability to continue as a going concern if Windstream Holdings were to succeed in its recharacterization and fraudulent transfer claims against us, reject the Master Lease or be unable or unwilling to perform its obligations under the Master Lease;

 

the ability and willingness of our customers to meet and/or perform their obligations under any contractual arrangements entered into with us, including master lease arrangements; 

 

the ability of our customers to comply with laws, rules and regulations in the operation of the assets we lease to them; 

 

the ability and willingness of our customers to renew their leases with us upon their expiration, and the ability to reposition our properties on the same or better terms in the event of nonrenewal or in the event we replace an existing tenant; 

 

our ability to renew, extend or retain our contracts or to obtain new contracts with significant customers (including customers of the businesses that we acquire); 

 

the availability of and our ability to identify suitable acquisition opportunities and our ability to acquire and lease the respective properties on favorable terms or operate and integrate the acquired businesses; 

 

our ability to generate sufficient cash flows to service our outstanding indebtedness; 

 

our ability to access debt and equity capital markets; 

 

adverse impacts of changes to our business, economic trends or key assumptions regarding our estimates of fair value, including potential impacts of recent developments surrounding Windstream that could result in an impairment charge in the future, which could have a significant impact to our reported earnings;

 

2


Table of Contents

 

 

the impact on our business or the business of our customers as a result of credit rating downgrades, and fluctuating interest rates; 

 

adverse impacts of litigation or disputes involving us or our customers;

 

our ability to retain our key management personnel; 

 

our ability to maintain our status as a real estate investment trust (“REIT”), including as a result of the effects of the recent events with respect to our largest customer, Windstream Holdings;

 

changes in the U.S. tax law and other federal, state or local laws, whether or not specific to REITs, including the impact of the 2017 U.S. tax reform legislation; 

 

covenants in our debt agreements that may limit our operational flexibility; 

 

the possibility that we may experience equipment failures, natural disasters, cyber attacks or terrorist attacks for which our insurance may not provide adequate coverage; 

 

the risk that we fail to fully realize the potential benefits of or have difficulty in integrating the companies we acquire; 

 

other risks inherent in the communications industry and in the ownership of communications distribution systems, including potential liability relating to environmental matters and illiquidity of real estate investments; and

 

additional factors discussed in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q and in Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2018, as well as those described from time to time in our future reports filed with the U.S. Securities and Exchange Commission (“SEC”).

Forward-looking statements speak only as of the date of this Quarterly Report. Except in the normal course of our public disclosure obligations, we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based.

 

3


Table of Contents

 

Uniti Group Inc.

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

5

 

Uniti Group Inc.

 

 

Condensed Consolidated Balance Sheets

5

 

Condensed Consolidated Statements of Income

6

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

7

 

Condensed Consolidated Statements of Shareholders’ Deficit

8

 

Condensed Consolidated Statements of Cash Flows

10

 

Notes to Condensed Consolidated Financial Statements

12

 

1.Organization and Description of Business

12

 

2.Basis of Presentation and Summary of Significant Accounting Policies

12

 

3.Revenues

17

 

4.Leases

19

 

5.Business Combinations, Asset Acquisitions and Dispositions

23

 

6.Fair Value of Financial Instruments

24

 

7.Property Plant and Equipment

27

 

8.Derivative Instruments and Hedging Activities

27

 

9.Goodwill and Intangible Assets and Liabilities

29

 

10.Notes and Other Debt

30

 

11.Earnings Per Share

33

 

12.Segment Information

35

 

13.Commitments and Contingencies

38

 

14.Accumulated Other Comprehensive (Loss) Income

39

 

15.Capital Stock

40

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

41

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

61

Item 4.

Controls and Procedures

61

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

62

Item 1A.

Risk Factors

63

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

63

Item 3.

Defaults Upon Senior Securities

64

Item 4.

Mine Safety Disclosures

64

Item 5.

Other Information

64

Item 6.

Exhibits

64

 

 

 

Signatures

65

 

 

 

 

4


Table of Contents

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Uniti Group Inc.

Condensed Consolidated Balance Sheets

 

(Thousands, except par value)

 

(Unaudited)

September 30, 2019

 

 

December 31, 2018

 

Assets:

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

$

3,371,151

 

 

$

3,209,006

 

Cash and cash equivalents

 

 

197,317

 

 

 

38,026

 

Accounts receivable, net

 

 

86,939

 

 

 

104,063

 

Goodwill

 

 

690,672

 

 

 

692,385

 

Intangible assets, net

 

 

536,654

 

 

 

432,821

 

Straight-line revenue receivable

 

 

612

 

 

 

61,785

 

Derivative asset

 

 

-

 

 

 

31,043

 

Other assets, net

 

 

147,880

 

 

 

23,808

 

Total Assets

 

$

5,031,225

 

 

$

4,592,937

 

 

Liabilities, Convertible Preferred Stock and Shareholders' Deficit:

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other liabilities, net

 

$

208,477

 

 

$

94,179

 

Accrued interest payable

 

 

73,638

 

 

 

28,097

 

Deferred revenue

 

 

1,040,288

 

 

 

726,262

 

Derivative liability

 

 

27,761

 

 

 

-

 

Dividends payable

 

 

9,830

 

 

 

113,744

 

Deferred income taxes

 

 

31,118

 

 

 

52,434

 

Finance lease obligations

 

 

55,225

 

 

 

55,282

 

Contingent consideration

 

 

11,440

 

 

 

83,401

 

Notes and other debt, net

 

 

5,010,287

 

 

 

4,846,233

 

      Total liabilities

 

 

6,468,064

 

 

 

5,999,632

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible preferred stock, Series A, $0.0001 par value, 88 shares authorized, issued and outstanding: no shares at September 30, 2019 and 88 shares at December 31, 2018, $87,500 liquidation value

 

 

-

 

 

 

86,508

 

 

 

 

 

 

 

 

 

 

Shareholders' Deficit:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 50,000 shares authorized, no shares issued and outstanding

 

 

-

 

 

 

-

 

Common stock, $0.0001 par value, 500,000 shares authorized, issued and outstanding: 192,138 shares at September 30, 2019 and 180,536 at December 31, 2018

 

 

19

 

 

 

18

 

Additional paid-in capital

 

 

948,382

 

 

 

757,517

 

Accumulated other comprehensive (loss) income

 

 

(27,452

)

 

 

30,105

 

Distributions in excess of accumulated earnings

 

 

(2,442,378

)

 

 

(2,373,218

)

Total Uniti shareholders' deficit

 

 

(1,521,429

)

 

 

(1,585,578

)

Noncontrolling interests - operating partnership units

 

 

84,590

 

 

 

92,375

 

      Total shareholders' deficit

 

 

(1,436,839

)

 

 

(1,493,203

)

Total Liabilities, Convertible Preferred Stock, and Shareholders' Deficit

 

$

5,031,225

 

 

$

4,592,937

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


Table of Contents

 

Uniti Group Inc.

Condensed Consolidated Statements of Income

(unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Thousands, except per share data)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leasing

 

$

179,648

 

 

$

174,822

 

 

$

532,773

 

 

$

521,481

 

Fiber Infrastructure

 

 

77,979

 

 

 

70,130

 

 

 

236,139

 

 

 

204,486

 

Tower

 

 

3,273

 

 

 

4,319

 

 

 

11,499

 

 

 

10,161

 

Consumer CLEC

 

 

2,729

 

 

 

3,365

 

 

 

8,663

 

 

 

10,752

 

Total revenues

 

 

263,629

 

 

 

252,636

 

 

 

789,074

 

 

 

746,880

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

104,655

 

 

 

80,406

 

 

 

286,842

 

 

 

237,398

 

Depreciation and amortization

 

 

101,166

 

 

 

112,748

 

 

 

307,571

 

 

 

342,311

 

General and administrative expense

 

 

25,267

 

 

 

20,666

 

 

 

75,921

 

 

 

63,867

 

Operating expense (exclusive of depreciation and amortization)

 

 

39,948

 

 

 

34,773

 

 

 

118,529

 

 

 

96,199

 

Transaction related and other costs

 

 

15,179

 

 

 

2,323

 

 

 

28,883

 

 

 

12,025

 

Gain on sale of real estate (Note 5)

 

 

(205

)

 

 

-

 

 

 

(28,995

)

 

 

-

 

Other (income) expense

 

 

(859

)

 

 

(1,038

)

 

 

(32,091

)

 

 

(1,574

)

      Total costs and expenses

 

 

285,151

 

 

 

249,878

 

 

 

756,660

 

 

 

750,226

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

 

(21,522

)

 

 

2,758

 

 

 

32,414

 

 

 

(3,346

)

Income tax (benefit) expense

 

 

(1,745

)

 

 

(1,466

)

 

 

10,152

 

 

 

(5,208

)

Net (loss) income

 

 

(19,777

)

 

 

4,224

 

 

 

22,262

 

 

 

1,862

 

Net (loss) income attributable to noncontrolling interests

 

 

(357

)

 

 

93

 

 

 

523

 

 

 

24

 

Net (loss) income attributable to shareholders

 

 

(19,420

)

 

 

4,131

 

 

 

21,739

 

 

 

1,838

 

Participating securities' share in earnings

 

 

(50

)

 

 

(655

)

 

 

(301

)

 

 

(1,992

)

Dividends declared on convertible preferred stock

 

 

-

 

 

 

(656

)

 

 

(656

)

 

 

(1,968

)

Amortization of discount on convertible preferred stock

 

 

-

 

 

 

(745

)

 

 

(993

)

 

 

(2,235

)

Net (loss) income attributable to common shareholders

 

$

(19,470

)

 

$

2,075

 

 

$

19,789

 

 

$

(4,357

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.10

)

 

$

0.01

 

 

$

0.11

 

 

$

(0.02

)

Diluted

 

$

(0.10

)

 

$

0.01

 

 

$

0.11

 

 

$

(0.02

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

191,940

 

 

 

175,396

 

 

 

185,746

 

 

 

175,101

 

Diluted

 

 

191,940

 

 

 

175,653

 

 

 

185,746

 

 

 

175,101

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

6


Table of Contents

 

Uniti Group Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net (loss) income

 

$

(19,777

)

 

$

4,224

 

 

$

22,262

 

 

$

1,862

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on derivative contracts

 

 

(8,646

)

 

 

7,744

 

 

 

(58,695

)

 

 

57,617

 

Changes in foreign currency translation

 

 

-

 

 

 

2,547

 

 

 

(63

)

 

 

2,233

 

Other comprehensive (loss) income:

 

 

(8,646

)

 

 

10,291

 

 

 

(58,758

)

 

 

59,850

 

Comprehensive (loss) income

 

 

(28,423

)

 

 

14,515

 

 

 

(36,496

)

 

 

61,712

 

Comprehensive (loss) income attributable to noncontrolling interest

 

 

(511

)

 

 

330

 

 

 

(678

)

 

 

1,404

 

Comprehensive (loss) income attributable to common shareholders

 

$

(27,912

)

 

$

14,185

 

 

$

(35,818

)

 

$

60,308

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


 

7


Table of Contents

 

Uniti Group Inc.

Condensed Consolidated Statements of Shareholders’ Deficit

(unaudited)

 

 

For the three months ended September 30,

 

(Thousands, except share data)

 

Preferred Stock

 

 

Common Stock

 

 

Additional Paid-in Capital

 

 

Accumulated Other Comprehensive Income

 

 

Distributions in Excess of Accumulated Earnings

 

 

Noncontrolling Interest

 

 

Total Shareholders' Deficit

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2018

 

 

-

 

 

$

-

 

 

 

175,028,835

 

 

$

17

 

 

$

645,627

 

 

$

56,237

 

 

$

(2,174,216

)

 

$

97,523

 

 

$

(1,374,812

)

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,131

 

 

 

93

 

 

 

4,224

 

At-the-market issuance of common stock, net of offering costs

 

 

-

 

 

 

-

 

 

 

3,180,548

 

 

 

1

 

 

 

64,422

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

64,423

 

Amortization of discount of convertible preferred stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(745

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(745

)

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,054

 

 

 

-

 

 

 

237

 

 

 

10,291

 

Common stock dividends declared

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(107,379

)

 

 

-

 

 

 

(107,379

)

Distributions to noncontrolling interest

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,480

)

 

 

(2,480

)

Convertible preferred stock dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(656

)

 

 

-

 

 

 

(656

)

Net share settlement

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4

 

 

 

-

 

 

 

(4

)

 

 

-

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

814

 

 

 

-

 

 

 

1,963

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,963

 

Balance at September 30, 2018

 

 

-

 

 

 

-

 

 

 

178,210,197

 

 

 

18

 

 

 

711,271

 

 

 

66,291

 

 

 

(2,278,124

)

 

 

95,373

 

 

 

(1,405,171

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2019

 

 

-

 

 

$

-

 

 

 

183,122,757

 

 

$

18

 

 

$

855,425

 

 

$

(18,960

)

 

$

(2,413,326

)

 

$

87,5